Remote deposit capture

One of the most popular mobile payment applications is remote deposit capture. RDC allows a person who wants to deposit a check to simply take a picture of the front and back with the camera on a mobile device and transmit the image to the depositor’s bank.254 _{That bank then} credits the depositor’s account and electronically sends the image to the bank of the person who wrote the check, called the “drawer” in the UCC.255 The drawer’s bank decides whether to “honor” the check by paying it. If it honors the check, it debits the drawer’s account based on the amount of the check.

The Federal Financial Institutions Examination Council has described the problems consumers may face when they use RDC.

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Faulty equipment, inadequate procedures, or inadequate training of customers … can lead to inappropriate document processing, poor image quality, and inaccurate

electronic data. Ineffective controls at the customer location may lead to the intentional or unintentional alteration of deposit item information … or re-deposit of physical items. … There may also be risks related to Web application vulnerabilities, authentication of a customer to the RDC system, and encryption used at any point in the process.

Risks associated with fraud are not unique to RDC; however, certain aspects of fraud risk are elevated in an RDC environment. Check alteration … may be more difficult to detect. … Similarly, forged or missing endorsements … may be less easily detected. … Certain check security features may be lost. … Counterfeit items may be … difficult to detect. Duplicate presentment of checks and images at the institution or at another depository institution represents both a business process and a fraud risk.256

The two parties in a deposit transaction are the “drawer” and the “depositor.” In a consumer transaction, either one or both may be consumers. The following analysis assumes that both are consumers. Unless otherwise noted, the depositor is the payee, the person the drawer intends to pay. Both the drawer and the depositor may encounter problems when the depositor uses RDC.

A legal analysis of RDC is complicated by several factors. The transaction involves both a paper check and the electronic transfer of a digital image of the check. While the check is still in its paper form, the transaction is subject to the rules of the UCC. The UCC is not a consumer protection statute. It purposefully leaves consumer protection issues to other laws that the federal government or a state legislature may choose to enact.257 _{In addition, its provisions are} tailored to banking technology in use during the 1990s, when the current version of UCC Article 4 was drafted and RDC did not exist.258

Electronic transfer of the funds represented by the check is governed primarily by the EFTA and Reg. E.259 Consumer protection is the explicit purpose of the EFTA.260 However, how it applies to certain aspects of RDC is uncertain because the EFTA was enacted decades before RDC was invented. To the extent that no law applies to a problem the consumer encounters using RDC, the agreement between the consumer and the bank binds the consumer.261

For example, the amount credited in the depositor’s bank account may not properly reflect the amount written on the check. As the FFIEC notes, the digital image may be of poor quality. Alternatively, faulty bank equipment may account for the problem. The credit to the depositor’s account may be in an amount greater than that written on the check or may be less than that

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amount. If it is less than that amount, the depositor will want to have the error corrected. But to do so, the depositor will have to try to identify how and at what stage of the transaction the error occurred, unless the depositor’s bank is willing to correct the error without that

information.

If the error resulted in a credit to the depositor’s account that is greater than the amount written on the check, the drawer’s account will be debited more than it should have been. In that case, it is the drawer who will seek to have the error corrected.

The EFTA and Reg. E include an error resolution procedure for consumers.262 _Consumer drawers and depositors can take advantage of those rules if they comply with Reg. E’s

requirements. Major limitations in those rules, however, may thwart the consumer’s ability to have the problem corrected. For example, the definition of error does not include a dispute over the quality or nondelivery of goods or services the transfer is paying for. Furthermore, the consumer must notify the financial institution within a certain period of time. In addition, the institution can limit its investigation of the alleged error to its own records and need not contact other parties to the transaction as part of its investigation.263 Moreover, if the drawer does not review the statement on which the error occurred, the drawer will not discover the error and will not be able to take advantage of the error resolution procedure. Even if the statement is reviewed, if the error is a small one, the consumer will not realize the mistake without carefully reviewing the exact amounts of the debits.

The drawer’s account also can be debited more than the amount of the deposited check in a scenario known as the “double debit.” This can occur in several ways. For example, a depositor may deposit the check using RDC. The depositor may forget having done so and take the paper check to the depositor’s bank to deposit it or obtain cash for it. The depositor’s bank forwards the check for collection, and it will be presented to the drawer’s bank. If the drawer’s bank does not realize the check has already been deposited via RDC, the drawer’s account will be debited twice. In another scenario, the depositor may use RDC to deposit the check and leave the paper check at home. A spouse or other joint accountholder, trying to be helpful, may deposit the paper check.

These problems could be prevented if the depositor writes “void” on the check immediately after making the RDC deposit. Once the check includes the word “void,” it cannot be deposited at a bank by anyone. Furthermore, no reasonable person, such as a check cashing store, should cash the check for the payee or any other holder. However, before voiding the check,

depositors should verify that their bank has properly recorded the transaction. If the check was not properly recorded and has already been marked as void, the depositor will not be able to

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deposit or cash it. Similarly, the consumer could prevent a double debit by destroying the check promptly after making the RDC deposit. However, that may also not be a good idea because the consumer may need the paper check if problems arise.264

Another safeguard the depositor could use would be to write a restrictive endorsement on the back of the check.265 _{“For deposit only” is an example of a restrictive endorsement. Depositors} should sign their name directly under the restrictive endorsement and not above the

endorsement. Otherwise, another person who obtains the check could sign under the endorsement, claim to have written the endorsement, and try to deposit the check.266 Depositors also could write their account numbers along with the endorsement so even if the paper check is stolen, the thief who tries to deposit it cannot prevent the funds from being deposited into the depositor’s account.

Adding a restrictive endorsement may be better than voiding the check. Since many consumers regularly sign their deposits in this manner already and writing “void” on a check is unusual, the depositor may forget to do it. In contrast, many depositors likely are accustomed to writing a restrictive endorsement as soon as they receive a check, and doing so in no way impedes their ability to use RDC.

However, clever wrongdoers can find ways to evade steps depositors take to protect themselves. For example, chemicals that are difficult to detect can erase restrictive endorsements and checks marked as void. When a person uses RDC to deposit a check by taking a picture of the front and back of the check, current technology cannot determine if the picture of the back of the check is actually what it purports to be.267 _{As a result, a thief who} steals the paper check containing a restrictive endorsement can take a picture of the back of a check that does not contain a restrictive endorsement and substitute that as the back of the stolen check the thief is depositing through RDC. Writing “deposit only” on the back of a check does not prevent a depositor from attempting to make multiple deposits via RDC by depositing the check at different banks.

Dishonest depositors have taken advantage of RDC to make double debits.268 _{Even if the} drawer correctly believes the person to whom the check is written is honest, a different person may be the one who deposits the check. A check is a negotiable instrument, meaning that simply by endorsing the check the original payee can transfer full right to payment to another person.269 _{The drawer has no control over whom that subsequent holder of the check may be.}

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One scheme that dishonest depositors have engaged in is to deposit the check using RDC, then take the paper check to a check cashing store and cash it there. Unless that store takes the check in bad faith or has noticed that the drawer has a claim or defense, the store has the status under the UCC of a “holder in due course.” If the drawer’s bank refuses to pay the store because it has already honored the check when it was deposited via RDC, the store can go after the drawer for payment.270

A dishonest depositor also may alter the check by raising the amount for which the check is made payable. Chemicals are available to make such alterations difficult for banks to detect. If the check has been converted to a digital image and deposited via RDC, it may be impossible to detect.271 _{As a result, the consumer’s bank will honor the check and debit the consumer’s} account for the altered amount of the check.

The UCC includes provisions that allocate liability when problems such as alterations arise.272 However, because the UCC was drafted long before RDC was developed, the law is ambiguous as to whether its provisions apply to RDC; if it does apply, it is unclear how. For example, the UCC includes a provision permitting the electronic presentment of checks.273 Presentment occurs when a financial institution transfers a check to the drawer’s bank for collection. If this provision applies to RDC, other provisions of the UCC may also apply. However, the language used in the presentment section seems to apply only to certain ways in which checks are presented to the drawer’s bank.274

The Expedited Funds Availability Act and Reg. CC require the depositor’s bank to make the funds from a deposited check available promptly.275 However, since the statute and regulation were drafted prior to the development of RDC, there are gaps in the law.276 _{If these laws do not} apply to checks deposited via RDC, the contract between the consumer and the bank will be established when funds are made available.277 As a result, a person who chooses to deposit the check using RDC may have to wait much longer until the funds from the check are available than if that person had deposited the check in person or through an ATM.278 _{Consumers may} wrongly assume that when checks are deposited through RDC the funds are available as quickly as deposits made in other ways. As a result, when consumers try to draw on deposited funds to make mobile payments, the funds may not be available and the consumers could overdraw their accounts.

Some banks that offer prepaid cards as well as nonbank prepaid card companies permit holders of the cards to use RDC to deposit checks in order to load money onto the cards.279 _{For the} most part, statutes and regulations covering RDC do not apply to prepaid cards.280

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Consequently, consumers’ rights are generally limited to those, if any, that are granted in the banks’ agreement with consumers.

Even if the UCC and the EFTA apply to RDC, gaps remain. Neither law addresses issues that may arise. For example, who is liable if the consumer’s camera takes a blurry image resulting in the wrong amount being deposited or the funds being deposited into the wrong account?

Alternatively, who is liable if the camera takes a clear picture but because of a glitch in electronically transmitting the image, the wrong amount or account number is sent? Who is liable for a double debit in each of the several scenarios in which that may occur? Private agreements among the commercial parties that process the payments may answer some or all of those issues. But consumers are not parties to those agreements. Even if the agreements protect consumers against liability, most know nothing about them and have no recourse to take advantage of them.

To the extent that no law applies to RDC, consumers and their banks are bound by the terms of their deposit agreements. Those agreements are written by the banks, and many provisions may favor them, not consumers.281 In addition to bank delays on the availability of funds, discussed above, many banks limit the amount that can be deposited through RDC each day or within 30 days.282 Moreover, even if the UCC applies, for the most part its rules are default rules that can be superseded by deposit agreements.283